Financial Friction

Yes, my pay stub was all sorts of messed up and if I didn’t understand it, then the issue would have persisted.

True story. For months I had collected a paycheck only caring about the bottom-line number (Net Pay). Of course, I didn’t have any real reason to look at the pay stub because it would have only told me what I already knew – that I got paid! Also, I assumed payroll processors could never mess up an employee’s pay…

It was Friday afternoon (I had been working for the company for a little over a year), I received my pay stub and as I began to fold the pay stub to put it in my desk drawer as I did many times before - curiosity struck,

As I was prompted by these thoughts, I noticed something was off. The deductions – this was the part that was all jacked up…

Most likely, you don’t review your pay stub for two reasons:

You know you got paid.

You got paid, cool! But what if you could have taken home more or saved an issue from getting even larger? Your payroll processor is human just like you, which makes them susceptible to the same mistakes you make. Even the most well-intentioned person messes up.

Education. You do not know all the terms or how it flows.

Our educational system does not teach people to read a pay stub in school, so how do people learn? If you don’t understand what you are looking at, ask someone to walk you through it or keep reading. Remember, there is no shame in making sure you’re being compensated for the work you’ve performed. I guarantee you that you are not alone in not understanding a pay stub.

Below, I have covered the minimum of what every pay stub should include. Keep in mind that pay stubs vary in look and the type of deductions based on your situation.

The Basics:

What is a Pay stub?

The document that outlines detail about your compensation.

The first piece of information to take into consideration when forming a budget. Every number in a budget flows from the information contained on a pay stub.

Employee Name

This is YOU! (Just wanted to make sure you’re still reading)

Current and YTD

Current is what you were paid for in the most recent pay period.

YTD (Year-To-Date) is the sum of how much you have earned in the current calendar year, thus far.

*You should see Current and YTD in each category on your pay stub.

Earnings

*This section may look different depending on the way an employee earns wages. If you are paid hourly, you will see the hours worked and the rate (how much earned per hour). If you are a salaried employee, you may only see a current and YTD number. You may also see other forms of compensation within this section.

Gross Pay

The amount before any taxes or deductions have been subtracted.

Net Pay

The amount after subtracting taxes and deductions from gross pay. Net pay is commonly referred to as “take home” pay.

Deductions

Taxes

Federal Income Tax

Depends on the number of exemptions you claimed when filling out the W-4 Form when you were first hired (it informs your employer on how much federal tax should be withheld).

FICA (Federal Insurance Contributions Act)

Social Security Tax

For 2019, the tax rate is 6.2% (the employee and employer both pay this tax for a total for 12.4%). Any dollar earned over $132,900 is NOT subject to this tax.

Medicare Tax

For 2019, the tax rate is 1.45% (the employee and employer both pay this tax for a total for 2.9%). Every dollar earned is subject to this tax - Any wages earned over $200,000 have an additional 0.9% tax for the employee.

State Tax

Each state has different laws regarding state tax. For more information, consult your Human Resource Department.

For an example, see the sample paystub above under the taxes section – there is a withholding for the state of North Carolina.

*Employers have additional taxes they must pay because they have employees. These additional taxes do not impact your earnings in any way.

Pre-Tax (Before)

Deductions taken from your gross pay before taxes are withheld. Pre-tax deductions reduce your taxable income, which will more than likely result in paying less Federal Income and FICA tax.

Below are examples of Pre-Tax Deductions:

Certain Retirement Plans

Life Insurance

Health Insurance

Health Savings Accounts or Flexible Spending Accounts

*Though you save on taxes when this deduction occurs, you may owe taxes on the withheld money in the future.

Post-Tax (After)

Deductions taken from your gross pay after taxes are withheld. Post-tax deductions do not reduce your taxable income, but could be beneficial depending on how these deductions are used.

Below are examples of Post-Tax Deductions:

Certain Retirement Plans

Disability Insurance

Life Insurance

Garnishments

Charitable Contributions

…To conclude my story, the payroll department had mistakenly deducted the 401k match (Employer contribution to my 401k) from my earnings for more than a quarter of the year. Thus, resulting in my net pay being less than it should have been. So, if you don’t want your paycheck to be jacked up, get educated on how to read your pay stub and scan over it each pay period.